I am a Tax Partner in WithumSmith+Brown’s National Tax Service Group and the founding father of the firm's Aspen, Colorado office. I am a CPA licensed in Colorado and New Jersey, and hold a Masters in Taxation from the University of Denver. My specialty is corporate and partnership taxation, with an emphasis on complex mergers and acquisitions structuring. In the past year, I co-authored CCH's "CCH Expert Treatise Library: Corporations Filing Consolidated Returns," was awarded the Tax Adviser's "Best Article Award" for a piece titled "S Corporation Shareholder Compensation: How Much is Enough?" and was named to the CPA Practice Advisor's "40 Under 40."

In my free time, I enjoy driving around in a van with my dog Maci, solving mysteries. I have been known to finish the New York Times Sunday crossword puzzle in less than 7 minutes, only to go back and do it again using only synonyms. I invented wool, but am so modest I allow sheep to take the credit. Dabbling in the culinary arts, I have won every Chili Cook-Off I ever entered, and several I haven’t. Lastly, and perhaps most notably, I once sang the national anthem at a World Series baseball game, though I was not in the vicinity of the microphone at the time.

Up this week: two cases that when taken together, effectively put an end to a tax planning opportunity that has been embraced by such luminaries as ESPN’s own Kirk Herbstreit and provided fodder for one of the more epic threads in taxalmanac.com message board history.

To illustrate the opportunity, assume you and the missus just bought a teardown on a prime piece of real estate in lovely East St. Louis. You could simply hire a construction company to demolish the existing home and carry away the rubble, but that’s gonna’ cost you. Or, with a little ingenuity, you could donate the home to the local fire department for use in their drills. What’s the benefit? The fire department does all the heavy lifting by burning the house to the ground — cutting your demolition costs significantly — and you get a charitable contribution deduction for the value of the house. It’ win-win.

At least, that’s the way it has been since the Tax Court blessed such a deduction in Scharf v. Commissioner, T.C.M. 1973-265, nearly 40 years ago.

During 2012, however, the courts may well have sounded the death knell for this tax planning opportunity. First, in February the Seventh Circuit upheld the Tax Court’s 2010 decision in Rolfs v. Commissioner, 135 T.C. 24, denying a taxpayer’s charitable contribution deduction on the grounds that the value of the donated home did not exceed the value of the $10,000 benefit the taxpayers received by having the home demolished for free. Mere months later, in Patel v. Commissioner, 138. T.C. 23, the Tax Court again denied a charitable contribution deduction, this time on entirely different grounds; holding that the donation failed to meet the requirements of Section 170 because it represented the contribution of a partial interest.

Rolfs v. Commissioner: What’s the value of a home you intend to burn down?

In Rolfs, both the Tax Court and the Seventh Circuit agreed that all of the statutory requirements were in place to support a charitable contribution deduction. At issue, however, was the home’s value. As a reminder, pursuant to the “quid pro quo” rules, the value of a charitable contribution must exceed the value of any benefit the donor receives in return. In this case, the taxpayers could not convince the court that the value of the home exceeded the $10,000 value of the demolition services.

In supporting their deduction, the taxpayers argued that the home should be valued based on the before-and-after method. Because the land was worth $76,000 less after the home was demolished, the taxpayers set the value of the home, and the resulting charitable contribution, at that amount. (Note: the taxpayers failed to reduce the value of their contribution by the $10,000 value received in return)

The Seventh Circuit disagreed, holding that the value of the home hadto take into consideration its imminent demise:

When a gift is made with conditions, the conditions must be taken into account in determining the fair market value of the donated property…proper consideration of the economic effect of the condition that the house be destroyed reduces the fair market value of the gift so much that no net value is ever likely to be available for a deduction, and certainly not here. What is the fair market value of a house, severed from the land, and donated on the condition that it soon be burned down? There is no evidence of a functional market of willing sellers and buyers of houses to burn.

The Seventh Circuit thus required the house to be valued at the higher of two alternatives:

1) What the house would be worth if it were immediately burned down and sold for scrap, or

2) What someone would pay for the house if they were required to uproot it and move it elsewhere.

According to an IRS expert witness, both values were held to be less than the $10,000 benefit derived from the home’s destruction, barring the taxpayers from claiming a charitable contribution deduction:

Witness Robert George…opined that no one would have paid the owners more than nominal consideration to have moved this house. George also opined that the salvage value of the component materials of the house was minimal and would be offset by the labor cost of hauling them away.

As a result, the taxpayers had not contributed value in excess of the value they received in return, and were thus barred from claiming a deduction.

Despite the Seventh Circuit’s decision to hold against the taxpayer, optimism remained within the tax community that Rolfs had left open the possibility that a different fact pattern might yield a different result. In Rolfs the house was old and ordinary; it stood to reason that a newer, more elaborate house would retain value to someone who was required to move it to a new location. That optimism was short-lived.

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